New Zealand building boom to help cool property, supports case for rate cuts

WELLINGTON: New Zealand's construction boom led to a 35% surge in building consents in the year to June, soothing concern over rising house prices to reinforce expectations that the central bank will reduce interest rates further.

The Reserve Bank of New Zealand held interest rates at 2.25% at its June review while voicing strong concern about rising house prices. Economists, however, are now expecting it to cut rates to 2.00 percent at a policy review on August 11.

The building consent figures released on Friday came hard on the heels of a report showing construction activity in 2015 topped an all time high of NZ$31 billion ($22.02 billion) and was projected to reach NZ$37 billion next year.

"New Zealand is in the midst of the largest building boom ever," Building and Housing Minister Nick Smith said after the government posted the latest numbers.

On the month, residential dwelling consents were up 16 percent nationwide, the strongest since June 2004.

A surge over the past year has been driven by a massive increase in consents for apartments in Auckland, New Zealand's largest city.

Concerned by rising house prices, the central bank has introduced macro-prudential tools to alleviate house price inflation and recently introduced new mortgage lending curbs in a bid to take some heat out of the market.

House prices in June were 43 percent higher than a previous market peak in 2007 and up 13.5 percent on the year, according to government property appraiser Quotable Value.

The central bank has consistently said the real solution lies in increased supply to meet demand pushed higher by a record level of migrants.

"The lift in June consents is an encouraging sign that building demand is continuing to grow," said ASB Senior Economist Jane Turner.

Earlier this week the Auckland City Council unveiled a new plan for housing that, if approved, will see much higher density housing in the nation's largest city.

The plan estimates some 13,000 homes will be built in Auckland next year.

There are worries about inflationary pressures in the construction sector, however, due to shortages of skilled labour.

A survey from the New Zealand Institute of Economic Research earlier this month indicated that construction firms intend to invest and hire more. Their plans could be hampered, however, as firms also reported the shortage of skilled labour was at its most acute since 2003.

Currently, the Goods and Services Tax (GST) is levied at 12 per cent on payments made for under-construction property or ready-to-move-in flats where completion certificate has not been issued at the time of sale.